LegalZoom Suffers Setback in North Carolina

[Correction: This post erroneously described an Alabama lawsuit against LegalZoom as active when, in fact, it had been dismissed in January 2014. See this post for a full explanation.]

When LegalZoom issued a press release last month announcing that the South Carolina Supreme Court had issued a determination that the company is not engaged in the unauthorized practice of law in that state, the news was widely reported by news media and blogs.

However, just two weeks later in neighboring North Carolina, a Superior Court judge handed the State Bar a partial victory in its six-year fight to shut down LegalZoom for unauthorized practice. That news seems to have slipped through the cracks.

In the North Carolina case, the court dismissed two counts in LegalZoom’s 2001 lawsuit against the bar, in which LegalZoom alleged that the bar’s efforts to shut it down violated the anti-monopoly and equal protection clauses of the state constitution.

At the same time, the court deferred ruling on the bar’s claim that LegalZoom is engaged in unauthorized practice, concluding that a more extensive factual record is required in order to explain questions such as how LegalZoom’s process prepares complex documents for its customers.

A separate issue also still pending in the North Carolina case involves LegalZoom’s application for approval to operate a prepaid legal services plan there. The company is registered to operate prepaid plans in 41 states and the District of Columbia.

Court Not Yet Comfortable

In 2008, the North Carolina State Bar ordered LegalZoom to cease-and-desist from the unauthorized practice of law. Although the bar took no further enforcement action, LegalZoom took the offensive and sued the bar in 2011, to which the bar then filed a counterclaim. Both parties then filed motions for judgment on the pleadings.

On March 24, Business Court Judge James L. Gale issued his ruling (see below), denying LegalZoom’s motion and partially granting the bar’s motion. Gale put off deciding the unauthorized practice issue, indicating that he still has many questions about LegalZoom’s process.

“The court is not yet comfortable that it understands the overall process of preparing more complex documents,” he wrote.

South Carolina Order

The South Carolina petition, which I mentioned at the outset, was filed in 2012 by lawyer and former state attorney general T. Travis Medlock, asking the Supreme Court to declare that LegalZoom was engaged in unauthorized practice. The Supreme Court appointed a special referee to investigate, Circuit Court Judge Clifton Newman. With a hearing date approaching, the parties reached a settlement and asked Newman to recommend its approval.

On Oct. 18, 2013, Newman issued his report, finding that LegalZoom “does not provide legal advice to anyone” and recommending that the Supreme Court approve the settlement. The Supreme Court, in a two-paragraph order issued March 11, 2014, adopted the recommendation and concluded that LegalZoom’s practices in the state “do not constitute the unauthorized practice of law.”

In his report, Newman compared LegalZoom’s software to the work of a scrivener, who transcribes information without giving advice or consultation.

“LegalZoom’s software acts at the specific instruction of the customer and records the customer’s original information verbatim, exactly as it is provided by the customer,” Newman wrote. “The software does not exercise any judgment or discretion, but operates automatically in the same fashion as a ‘mail merge’ program.”

He also found that most of the form documents LegalZoom offers in South Carolina are already available from other sources, including the websites of state and local governmental agencies and courts.

In the settlement agreement, LegalZoom agreed to modify its business practices for South Carolina customers for 24 months. It agreed to offer only forms that match those already provided by government agencies or courts or that have been reviewed and approved by an attorney licensed in South Carolina.

Also as part of the settlement, it agreed to allow refunds to any South Carolina customer for 60 days from the purchase of a form and to pay $500,000 to the petitioner for his attorneys’ fees and costs.

Other States

Meanwhile, LegalZoom continues to face challenges in other states, including Alabama and Arkansas. On Oct. 3, 2013, the Supreme Court of Arkansas granted LegalZoom’s request to send a lawsuit pending there to arbitration, pursuant to the mandatory arbitration clause in LegalZoom’s terms of service.

Elsewhere, LegalZoom has settled unauthorized practice lawsuits. In California in 2012, it settled two class actions. It also settled a class action in Missouri in 2012, agreeing to pay $1.9 million in attorneys’ fees and to modify certain aspects of its business, and in 2010, it settled a lawsuit brought by the state of Washington alleging violations of that state’s consumer protection law.

The idea that document automation software is the practice of law is just another attempt by the organized bar in some states to protect lawyers’ income in the name of protection of the public interest. Instead of figuring out how to deliver to consumers the value that they want around common legal actions, the organized bar persists in fighting a rear-guard action to preserve its monopoly of the delivery of legal services.

If 80% of American consumers can’t afford the high cost of legal fees for common legal actions, then it is clear that the Bar’s regulatory scheme is not working to serve broader public interest..

If the legal profession only serves the top 20% of the US population, then there is some something radically wrong with the idea that only lawyers should be the only group authorized to deliver legal solutions.

People can solve their legal problems in ways that don;t require an attorney, particularly as the information component in law becomes digitized and convert into apps that are available at low cost or for free.

Laurel Francoeur

How do they define the software as not making any judgment? If you select “N/A” on the form and the form jumps to the next section, is that making a judgment/decision? And wasn’t judgment used initially by the programmer when s/he chose to include some phrases and not others? If you choose in a will for example that you have no issue so it prints language consistent with that and grays out per stirpes language, isn’t that a decision? Frustrating. Also frustrating that there is not uniformity on this. What does the ABA think? Sorry if I am throwing out there questions with as of yet no answers, but it makes me nervous. Thanks, and thanks for sharing the article.

Richard: I agree. I looked at the UPL issue extensively in the context of mediation. While I am not familiar with all the services offered by LegalZoom, offering forms for download should qualify as providing legal information, not legal advice. Providing legal information should not be considered the practice of law. It sweeps too broadly catching librarians and court clerks. Lawyers need to figure out how they can add value without relying on the simple act of providing information (which is now largely available for free — on line). For real insight to this issue, read Susskind’s Tomorrow’s Lawyers.

Speaking here as someone who has recently accessed the services of Legal Zoom to file corporate documents, I found the experience very practical and thus satisfying. It was efficient, painless and cost significantly less than I would have paid an attorney. I’m not in the 20% that can afford to pay for a Ruth Chris steak when a Wendy’s burger will do. My legal “transaction” did not require a face to face consult or anything unique. In fact, in the past I had completed such forms using the Florida Sunbiz website without counsel – I am not a lawyer, I just work with them. This time, I chose to use Legal Zoom because I didn’t want to take the time to sort through which docs I needed to file and when. Basically, I view the services I used as clerical. Something that a corporate paralegal or legal assistant does in a law firm setting. Although I know plenty of lawyers, and almost felt like a traitor using Legal Zoom, the fact remained that going the traditional route would have taken much longer. I knew that my needs would be considered a small “account” in a law firm. I’d have gotten no more attention, maybe less, than I got from Legal Zoom and would have paid twice as much. I’m not suggesting that there aren’t issues here to be considered and addressed, however, it’s a new era, a virtual world in many ways, and those who are comfortable with using a website to, for example, form a corporation and manage the paperwork should be allowed to do so and take advantage of the benefits. The corporate formation pro-plan also gives me access to many other small business forms such as contracts and access to REAL attorneys to review them for me. I plan to use Legal Zoom to update my will and medical directive. Until someone tells me these basic forms don’t hold up in court, I’m a believer.

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